Beruflich Dokumente
Kultur Dokumente
( HIKCHE)
CMP: | 166 Target: | 200 ( 21%) Target Period: 12 months BUY
March 04, 2019
Initiating Coverage
Particulars
growth engines. The company has evolved as a B2B player catering to Particular Amount
global crop protection and specialty chemical companies besides Market Cap | 2044 crore
pharmaceutical and animal health players. For 9MFY19, pharma and crop Debt (FY18) | 635 crore
protection accounted for 60% and 40%, respectively, of total operating Cash (FY18) | 27 crore
EV | 2652 crore
revenues. We are initiating coverage on the company as we find a
52 week H/L (|) 207/134
compelling risk-reward proposition at the current level considering the
Equity capital | 24.7 crore
capability of the company in both pharma and crop protection along with
Face value |2
future growth prospects based on client stickiness and calibrated capex.
MF Holdings (%) 1.5
Expertise in APIs to drive pharma growth FII Holdings (%) 4.2
Key Highlights
Hikal ventured into the pharma API business by virtue of acquisition of
Novartis’ Panoli plant in the year 2000. In a short span of time, banking on Hikal has a unique business model,
with crop protection and pharma as
its chemistry skills, the company has been able to tap incremental customers separate growth engines
via the CDMO route. Hikal also operates as a dedicated API supplier as it
expands its portfolio. We expect the pharma segment to grow at a CAGR of
Expertise in APIs is expected to drive
pharma growth
15.5% in FY19-21E to | 1250 crore on the back of new offerings and repeat
Crop protection growth to piggyback
business from CDMO customers. on client relationship
Crop protection growth to piggyback on client relationship After years of volatility in growth, the
Sep-16
Mar-17
Sep-17
Mar-18
Sep-18
Mar-19
& Co, Bayer, Syngenta, BASF, Pfizer to name a few. With proven capabilities
CNX Pharma Hikal
and management pedigree, we believe Hikal offers a compelling value
proposition as it continues to expand in both pharma and crop protection Source: ICICI Direct Research, Company
segments with separate focus and a calibrated approach. This bodes well in
the current scenario when Chinese supply disturbances are likely to create
opportunities for Indian players both in APIs and crop protection CDMO. The Research Analyst
company has spent ~| 500 crore over the last five years to augment
Siddhant Khandekar
capacities. After years of volatility in growth, Hikal has been witnessing a
siddhant.khandekar@icicisecurities.com
relatively stable growth trajectory. We expect sales, EBITDA, PAT to grow at
a CAGR of 15%, 18%, 30%, respectively, in FY19-21E on the back of new MItesh Shah
launches and better operating leverage. Simultaneously, we also expect a mitesh.sha@icicisecurities.com
330 bps RoCE improvement to 17.3% through FY21. We arrive at a valuation
of | 200 based on 15x FY21E EPS of | 13.3.
Company background
Established in 1988, Hikal is predominantly a B2B player that provides
intermediates and active ingredients to global pharmaceutical, animal
health, crop protection and specialty chemical companies. For 9MFY19, Hikal is predominantly a B2B player that provides
pharma and crop protection accounted for 60% and 40%, respectively, of intermediates and active ingredients to global
operating revenues. The pharma business is currently divided almost pharmaceuticals, animal health, crop protection and
equally between generic active pharma ingredients (APIs) and contract specialty chemicals companies
development and manufacturing organisation (CDMO) businesses. Animal
health business accounts for 20-25% of CDMO business. In crop protection,
70% of revenues are derived from CDMO with the remaining from
proprietary products, specialty chemicals and specialty biocides. Hikal owns
five manufacturing facilities: Taloja, Mahad (Maharashtra), Panoli (Gujarat)
Jigani (Karnataka) and an R&D centre at Pune.
Exhibit 1: Flow chart (gross revenues of FY19E)
Jigani hosts two manufacturing plants: Unit I is spread over 87000 square
metre. It is USFDA approved for manufacturing intermediates and active
pharmaceutical ingredients (APIs). Unit II is spread over 8000 square metre.
The Panoli plant is spread over 126,000 square metre. The site received
For the pharma segment, the company owns
USFDA accreditation in September 2012 and EUGMP in January 2014. It is
manufacturing facilities at two locations- Jigani near
involved in manufacturing intermediates along with specialty chemicals
Bengaluru and Panoli in Gujarat
insecticides and intermediates for crop protection.
In the CDMO business, the company focuses on developing APIs for the
commercialised products of innovator companies that are in the late stage
of patent expiry.
The animal health business accounts for 20-25% of the CDMO business and Animal health business accounts for 20-25% of the
8-10% of overall pharma segment. The company has a strong business CDMO business and 18-10% of overall pharma
relationship with four of the top eight global animal health companies in the segment
world.
Crop protection (40% of revenues) - Hikal partners with crop protection In CDMO (70% of crop protection business) the
companies for custom synthesis and custom manufacturing of company works with global innovators
intermediates and active ingredients. It manufactures insecticides,
Investment Rationale-
Expertise in APIs to drive pharma growth
Having got established as a crop protection B2B player, Hikal ventured into Pharma bifurcation
the pharma API business by virtue of acquisition of Novartis’ Panoli plant in
2000. The company later acquired another manufacturing and R&D facility
at Jigani near Bangalore in 2001. Since then, Hikal has developed and filed
as many as 28 drug master files (DMFs) with the USFDA for the US market.
The company has also filed product dossiers for other regulated markets.
As mentioned earlier, the business was divided almost equally between
CDMO APIs
generic APIs and CDMO. ~50% ~50%
Currently, the company has around eight to nine products in the generic
portfolio and five to six products in CDMO. Gabapentin (CNS) is the largest
product that contributes ~40% to total pharma sales. The pharma business
is mainly export-oriented with ~55% of sales derived from the US, 30% from
Europe and the balance from the rest of the world (RoW).
Source: ICICI Direct Research, Company
During FY16-19E, pharma segment grew at ~18% CAGR YoY due to 1)
timely addition of capacity, 2) new launches, 3) improved market share in
existing products, 4) windfall on account of API supply constraints from
China and 5) favourable currency. The company is mainly focusing on
Central Nervous System (CNS) and anti-diabetic segments.
Exhibit 5: Strong growth in FY16-19E (| crore)
200
0
FY16 FY17 FY18 FY19E
Pharma
higher standard of living and last, but not the least, the US-China trade war
have impacted API exports to the US. Although Chinese goods have not
been altogether out of the game, the void has provided other global players,
especially Hikal and other Indian API manufacturers, an opportunity to fill the
gap, to a greater extent.
Some of China’s loss can be India’s gains…
The once unparalleled Chinese bulk manufacturing capability and capability What can be termed as a new opportunity for Indian
in APIs is facing headwinds for the first time. Even though most of the lost players is the strategic shift of global players from
ground is likely to be restored, the remaining vacuum still presents a good single sourcing to multiple sourcing of APIs and
opportunity for Indian players to step in. What can be termed as a new intermediates to counter the uncertainties in the
opportunity for Indian players is the strategic shift of global players from future
single sourcing to multiple sourcing of APIs and intermediates to counter
the uncertainties in future. India can be a perfect strategic fit due to dual
sourcing for global customers, mainly on legacy adherence to stringent
compliance (1298 UAFDA approved API units) and zero-discharge
compliance adopted by most players at the behest of state governments
besides technical capability and local sourcing.
Another advantage for sourcing APIs from India can be its legacy proficiency
in formulations (where China lags), thus providing an end-to-end solution
for customers. The Indian formulations market is the third largest in terms
of volume and thirteenth largest in terms of value globally. The Indian
pharma industry supplies 40% of generic demand in the US and 25% of all
medicine in the UK. Companies like Hikal are poised to benefit in this sort of
a scenario as they can be potential suppliers to global and Indian players.
Exhibit 7: Potential incremental opportunity for Indian players (10% assumption)
CDMO
Hikal approaches innovator companies targeting their late stage The company has a dedicated business
commercialised products, which are likely to face steep competition post development team for the US, Europe and Japan to
patent expiry in the near term, for value proposition. Similarly, the company identify large and virtual companies for CDMO of
also offers early-stage R&D services such as synthesis, scale-up, API intermediates and APIs that are in different stages of
development, stability studies and method development all the way through development
manufacturing services, ranging from preclinical R&D material for clinical
trial purposes and commercial production, Phases I through III. For this
business, the company has a dedicated business development team for the
US, Europe and Japan to identify large and virtual companies for CDMO of
intermediates and APIs that are in different stages of development.
Currently, the company is working on five to six products in CDMO segment.
Following are some key contracts the company is pursuing currently
US innovator client: Hikal is the contract manufacturer of two large volume
molecules, a neuropathic pain reliever and an anti-cholesterol molecule
exclusively for a leading US-based innovator company. These products
have stringent technical specification requirements. As per the
management, both these products are for life-cycle extension. The volumes
of both these molecules increased this year. The trend is expected to
continue next year as well.
Pharma
700 CAGR 19.6% During FY16-19E, the crop protection business grew
610.3
600 547.3 ~20% YoY due to 1) successful commercialisation
of new products, 2) diversification into specialty
500 423.3 chemicals and specialty biocides, 3) windfall on
400 356.5 account of Chinese supply constraints of key crop
(| crore)
and high volume product for one of its global innovator customers. Based
on the company’s on-time delivery, quality and successful scale up, the
client has awarded an exclusive supply contract to make the precursor of
this product to the company.
Thiabendazole– This product accounts for less than 15% of the crop
protection sales and is one of the company’s legacy crop protection
products. The product is versatile and used in both crop protection to
control mould and other fungal diseases in fruits and vegetables, as well as
an anti-parasitic to control roundworms. It is also used in the material
protection industry to prevent fungal growth.
years. However, the company expects revenue from this product from FY19
onwards.
Hikal owns a research and technology (R&T) centre in Pune for crop
protection, biocides and specialty chemicals products. The company has
several new products in the pipeline, both for customers in contract
manufacturing and own development. Hikal is developing a versatile
product that is used as a microbiocides as well as a fungicide. It has a wide The company is developing a versatile product that
range of applications as a preservative in varnishes, adhesives, inks, laundry is used as a microbiocides as well as a fungicide
detergents, stain removers, fabric softeners, leather processing solutions,
fluid preservation and in emulsion paints. The company expects to scale up
and further commercialise these products in the near future.
Exhibit 11: Crop protection business expected to grow at 12.5% over FY19-21E
1000
CAGR 12.5%
CAGR 19.6% 773.0
672.2
610.3
547.3
(| crore)
423.3
356.5
0
FY16 FY17 FY18 FY19E FY20E FY21E
Crop Protection
Source: ICICI Direct Research, Company
Financial highlights
Revenues expected to grow at CAGR of 15% over FY19-21E
The 9MY19 revenues grew 24.5% YoY to | 1132 crore on the back of robust
performance across segments. Volume growth was 13-15% while the
remaining growth was attributable to favourable currency movement and
higher realisation. This, in turn, was possible due to passing on of
incremental raw material cost to customers. Raw material prices increased
mainly due to raw material supply constraints from China.
Segment wise, the pharma segment grew 26.4% YoY to | 680 crore owing
to 1) direct advantage of APIs supply constraint from China, 2) volume The company also entered into a partnership with
growth in existing products and 3) new launches. Crop protection has also new players, which has started contributing to
grown 21.7% YoY to | 452 crore due to 1) commercialisation of new growth
products 2) strong volume growth from existing products led by
geographical expansion and market share gain and 3) higher contribution
from specialty biocides and specialty chemicals segments. The company
also entered into a partnership with new players, which has started
contributing to growth. Looking at the company’s strong product pipeline, Currently, around 15-20% of reported sales are via
capacity expansion, timely execution and order positions, we expect growth new products both in pharma and crop protection.
momentum to continue, going ahead. Currently, 15-20% of reported sales This is expected to go to 25%
are via new products both in pharma and crop protection. The management
expects this percentage to go up to 25% per year, going forward. We expect
revenues to grow at a CAGR of 15.1% YoY to | 2051 crore.
Exhibit 12: Revenues expected to grow at 15.1% CAGR over FY19-21E
925.7 1013.9
1000
500
0
FY16 FY17 FY18 FY19E FY20E FY21E
Revenues
Source: ICICI Direct Research, Company
Exhibit 13: Pharma to grow at 15.5% over FY19-21E Exhibit 14: Crop protection to grow at 12.5% (FY19-21E)
1400 1250.2 900
773.0
1200 1087.1 800
672.2
937.6 700 610.3
1000
752.8 600 547.3
800
569.1 610.7 500 423.3
600 400 356.5
400 300
200 200
0 100
FY16 FY17 FY18 FY19E FY20E FY21E 0
FY16 FY17 FY18 FY19E FY20E FY21E
Pharma Crop Protection
Source: ICICI Direct Research, Company Source: ICICI Direct Research, Company
80 67.7
60 41.2
40
20
0
FY16 FY17 FY18 FY19E FY20E FY21E
Net Profit
Source: ICICI Direct Research, Company
7.3
6
4
2
0
FY16 FY17 FY18 FY19E FY20E FY21E
20.0 6.5
0.0
FY14 FY15 FY16 FY17 FY18 FY19E FY20E FY21E
350.0
300.0
250.0
200.0
150.0
|
100.0
50.0
0.0
Mar-16
Mar-17
Mar-18
Mar-19
Sep-16
Sep-17
Sep-18
Price 33.7x 13.5x 25.1x 19.3x 16.4x
Exhibit 21: One year forward PE of company vs. Nifty Pharma Index
45.00
36.00
17% Discount
27.00
(x)
18.00
9.00
0.00
Mar-16
Mar-17
Mar-18
Mar-19
Sep-16
Sep-17
Sep-18
4. Risk of raw material supply – FY18 gross margins declined 369 bps
to 46.1% mainly due to a sudden shoot up in raw material prices
leading to supply constraint from China. The company procures 30-
35% of raw materials from China. However, indirectly also most of
the raw material supply and prices were impacted by China issues.
Hikal is looking at backward integration and alternative sources to
mitigate this risk. The company also has the ability to pass on a
majority of the increase in raw material prices to the end user albeit
with lags. However, we are not denying such raw material volatility
in future, which may impact Hikal’s profitability.
Financials
Exhibit 22: Profit & Loss (| crore)
(Year-end March) FY18 FY19E FY20E FY21E
Revenues 1,296.1 1,548.1 1,783.7 2,051.3
Growth (%) 27.8 19.4 15.2 15.0
Raw Material Expenses 699.0 809.8 910.1 1,036.5
Employee Expenses 128.1 152.1 180.8 205.1
Other Manufacturing Expenses 227.3 292.5 347.8 400.0
Total Operating Expenditure 1,054.4 1,254.4 1,438.7 1,641.6
EBITDA 241.7 293.7 345.0 409.7
Growth (%) 24.4 21.5 17.5 18.7
Interest 49.1 59.2 57.3 57.3
Depreciation 85.6 93.2 103.1 114.1
Other Income 4.5 2.8 4.1 5.3
PBT before Exceptional Items 111.5 144.1 188.7 243.5
Less: Forex & Exceptional Items 0.0 0.0 0.0 0.0
PBT 111.5 144.1 188.7 243.5
Total Tax 34.3 46.8 61.3 79.1
PAT before MI 77.2 97.3 127.4 164.4
Minority Interest 0.0 0.0 0.0 0.0
PAT 77.2 97.3 127.4 164.4
Adjusted PAT 77.2 97.3 127.4 164.4
Growth (%) 14.0 26.1 30.9 29.0
EPS 6.3 7.9 10.3 13.3
EPS (Adjusted) 6.3 7.9 10.3 13.3
Source: ICICI Direct Research, Company
RATING RATIONALE
ICICI Direct endeavours to provide objective opinions and recommendations. ICICI Direct assigns ratings to its
stocks according to their notional target price vs. current market price and then categorises them as Strong Buy,
Buy, Hold and Sell. The performance horizon is two years unless specified and the notional target price is defined
as the analysts' valuation for a stock
Strong Buy: >15%/20% for large caps/midcaps, respectively, with high conviction;
Buy: >10%/15% for large caps/midcaps, respectively;
Hold: Up to +/-10%;
Sell: -10% or more;
research@icicidirect.com
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